With Earnings on Tap, Banking on Bank ETFs

Up 7% over the past month, the Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector ETF, looks sturdy ahead of spate of third-quarter earnings reports due out this week and next week from major banks.

Some strategists also argue that the financial sector may be a good area to look at this time around, given the potential for growth in a rising rate environment, along with potential tax and regulatory changes under the Donald Trump administration. After failing on the healthcare front, Congressional Republicans are likely to push forward with tax reform, looking to make that the centerpiece of their 2017 legislative accomplishments.

Rising interest rate expectations are also fueling a rally in XLF and rival financial services funds.

XLF “has moved higher in tandem with expectations for a third rate hike in 2017, with the CME Group’s FedWatch tool now predicting an 86.7% chance that the U.S. central bank will lift its benchmark rate by 25 basis points at the December meeting,” according to Schaeffer’s Investment Research.

As conditions improve, the Federal Reserve will tighten its monetary policy to obviate an overheating economy. The central bank has already outlined plans to start winding down its trillion dollar balance sheet in October and left a December rate hike open. Investors should anticipate a tighter policy as a key inflation gauge this week could confirm U.S. inflation is moving toward the Fed’s 2% target.